The Franchise (Amendment) Act 2020
22 April 2021
The Franchise (Amendment) Act 2020 (“Amendment Act”) was gazetted on 6 March 2020 and is expected to come into force soon. In this Alert, we highlight some of the key changes to be introduced to the Franchise Act 1998 (“Act”) under the Amendment Act.
Section 6(1) of the Act requires a franchisor to register his franchise before he can operate a franchise business or make an offer to sell the franchise to any person. Section 6(2) provides that failure to comply is an offence. Section 54 of the Act provides that a foreign person who intends to sell a franchise in Malaysia or to any Malaysian citizen shall apply to the Registrar for approval.
The Franchise Registry has always taken the position that a local franchisor is required to register under Section 6 while a foreign franchisor is required to apply for approval under Section 54.
The Amendment Act seeks to amend Section 6(1) of the Act by providing that a “franchisor or a foreign person who has obtained an approval to sell a franchise in Malaysia or to any Malaysian citizen under Section 54 shall register his franchise before he can operate a franchise business or make an offer to sell the franchise to any person”. The Amendment Act will also amend Section 6(2) of the Act to provide that “any franchisor or foreign franchisor” who fails to register the franchise commits an offence.
There is therefore now a two-step process for foreign franchisors who will need to apply for approval under Section 54 of the Act and then apply for registration under Section 6 of the Act. The transitional provisions provide that any foreign person who has obtained Section 54 approval before the coming into force of the Amendment Act shall be deemed to have registered his franchise under Section 6 of the Act.
Section 6A of the Act requires the franchisee of a foreign franchisor to register the franchise before commencing the franchise business while Section 6B requires the franchisee of a local franchisor to register the franchise within 14 days from the date of signing the franchise agreement. The Act is silent on the consequences of failing the register. The Amendment Act resolves this uncertainly by providing that failure to comply is an offence.
Period of effectiveness and renewal of franchise registrations
Currently, franchise registrations are effective for an indefinite period unless the Registrar issues a written order to the franchisor to suspend, terminate or cancel the registration. The Amendment Act introduces a fixed term for the franchise registration, the duration of which is to be prescribed. The franchisor is required to apply for renewal within 30 days from the expiration date of such registration. The transitional provisions provide that registration obtained under the Act shall continue to be effective for such period as prescribed; therefore existing franchise registrations will also need to be renewed when the term comes up. We await the regulations to be issued by the Minister of Domestic Trade and Consumer Affairs to specify the duration of a new franchise registration and for existing registrations.
Display of registration of franchise
The Amendment Act introduces a requirement for the franchisor or franchisee to, at all times, display the registration of franchise in a conspicuous position at the franchisor’s or franchisee’s place of business. Failure to comply constitutes an offence.
Failure to include mandatory terms in a franchise agreement
Section 18 of the Act stipulates certain mandatory terms which must be included in a franchise agreement and provides that failure to include such terms will render the franchise agreement null and void. The Amendment Act makes failure to include the mandatory terms an offence rather than rendering the franchise agreement null and void.
The Amendment Act also seeks to strengthen the enforcement powers given to authorised officers under the Act. The Amendment Act will introduce, among others, the following provisions into the Act:
- Section 44A: Search warrants to be valid notwithstanding any defect, mistake or omission;
- Section 48A: Anything seized under the Act shall be liable to forfeiture; and
- Section 48C: No cost or damages arising from seizure is recoverable unless the seizure was made without reasonable cause.
An offence for the failure to register a franchise under Section 6(1) of the Act is punishable with:
- where the person is a body corporate, a fine not exceeding RM250,000, and for a second or subsequent offence, a fine not exceeding RM500,000; or
- where the person is not a body corporate, a fine not exceeding RM100,000 or imprisonment for a term not exceeding one year or both, and for a second or subsequent offence, a fine not exceeding RM250,000 or imprisonment for a term not exceeding three years or both.
Apart from the punishment for an offence against Section 6(1) mentioned above, each offence mentioned in this article is punishable under Section 39 of the Act with:
- where the person is a body corporate, a fine of not less than RM10,000 and not more than RM50,000, and for a second or subsequent offence, a fine of not less than RM20,000 and not more than RM100,000; or
- where the person is not a body corporate, a fine of not less than RM5,000 and not more than RM25,000 or imprisonment for a term not exceeding six months, and for a second or subsequent offence, a fine of not less than RM10,000 and not more than RM50,000 or imprisonment for a term not exceeding one year.
In addition, the Court may, when sentencing a franchisor for an offence under Section 39:
- declare the franchise agreement to be null and void;
- order the franchisor to refund any payment which he has obtained from any franchisee; or
- prohibit the franchisor from making any new franchise agreement or appointing any new franchisee.
The general effect of the Amendment Act is two-fold. The removal of the provision that renders a franchise agreement null and void for omissions of mandatory terms specified in Section 18 of the Act will be welcomed by the franchise industry. On the other hand, the Amendment Act will also introduce additional regulatory restrictions on franchise operations in Malaysia and make the requirement for compliance more stringent.
Alert by Leela Baskaran (Partner) and Cheam Tat Sean (Associate) of the Intellectual Property Practice of Skrine.